Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Thursday, May 27, 2010

Krugman: In Despair Because Governments Are Reluctant to Inflate Even More?

In his post, "Reasons to Despair," Paul Krugman declares that the prospects for economic recovery are "grim." I happen to agree with him, but our reasons are quite the opposite. For Krugman, his despair is based upon his belief that governments are not inflating enough, while I believe governments are inflating way too much. Obviously, there is no way for our ideas to intersect.

Krugman writes:

Here’s where we are: growing GDP, but mass unemployment still the law of the land, with only tiny progress so far. What can be done?

Well, we could have more fiscal stimulus — but Congress is balking even at the idea of extending aid for the ever-growing ranks of the long-term unemployed. Fiscal responsibility, you see — hey, and let’s make sure estate taxes stay low!

We could get tough with China, which continues its currency manipulation and, in the face of a world of grossly inadequate demand, is actually tightening monetary policy to avoid an overheating economy — when basic textbook economics says that it should be appreciating its currency instead, which would not only rebalance China’s economy but help the rest of the world. So given China’s outrageous behavior, Geithner went to China, got nothing .. and pronounced himself very pleased.

We could do more through monetary policy. Macro theory suggests that the theoretically right answer, if you can do it, is to get central banks to commit to a higher inflation target. But the Fed and the Bank of Japan say no, because … well, that’s not what central bankers do.

It’s depressing: shibboleths and conventional wisdom are blocking all routes out of this slump. And I worry that policy makers will just sit there, for years and years, all the while congratulating themselves on the soundness of their policies.

So, Krugman despairs because the governments won't print enough money and won't confiscate enough wealth from others. Now, he does not explain how destruction of the currency and confiscation of wealth will lead to a "recovery," but I am sure that the answers can be found in his columns.

And China is being "outrageous"? As a commenter pointed out, if China is trying to tighten its output of currency, that alone will result in "appreciation" of its money. (What Krugman claims is that China is overvaluing the US Dollar in relationship to its own currency, which actually makes its own people poorer, yet Krugman actually wants us to believe that this is good for China and bad for us.)

There is a larger problem here, and that is the Krugman-Keynesian view of the economy. In Krugman's view, consumption is irrelevant and unrelated to production. Instead of being purposeful, consumption is little more than "buying back the products made," as though the real purpose of consumption is to get goods off the shelves. In Keynesian doctrine, the purpose of an economy is production for its own sake.

Perhaps this is why Keynesians really wanted us to believe that the economies of the Soviet Union and the old Eastern Bloc were "growing" because the GDP numbers that their bureaucracies spit out were becoming larger every year. The Keynesians were fascinated with the "output" figures, but never once took a hard look at what was being produced, from autos to consumer goods, with much of it being outright junk.

So now, all that is needed is yet another "stimulus" outburst, higher taxes, and even more inflation, and that is going to bring prosperity? And, to launch what effectively would be a protectionist trade war with China? Right.

Should readers wish to get a more sound view of economics, read Henry Hazlitt's classic Economics in One Lesson. Although the first edition came out before Krugman even was born, nonetheless it really is a line-by-line refutation of the nonsense that the 2008 Nobel winner in economics puts out.

1 comment:

As always, another brilliant dissection of the views espoused by Krugman. Kudos for your reference to Hazlitt's book. I've never found a better offering for the layman and have used his reasoning in numerous debates over the years.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).